The outgoing German finance minister, Wolfgang Schäuble, has recently expressed concerns about the risks posed to the world economy by high levels of debt. This column presents the latest Centre for Macroeconomics and CEPR survey of leading economists, in which a strong majority of respondents agree that an excess of public and private debt together with inflated asset prices mean that the world economy faces heightened risks. A similarly strong majority of the experts also agree that the loose monetary policy of major central banks is responsible for the recent increase in global leverage and asset values.

High asset prices can foreshadow tail risks in inflation. Based on data from 11 advanced economies since 1985, this column shows that high asset prices usually signal future high inflation episodes, but can occasionally signal low inflation or deflation instead. The transmission time of asset prices to inflation can be quite long. For central banks, this implies that the signalling content of asset prices for inflation is uncertain, both in timing and direction.

The growth of the asset management industry has raised concerns about its potential impacts on financial stability. This column assesses the systemic risk created by fund managers’ incentive problems and a first-mover advantage for end investors. Fund flows and fund ownership affect asset prices, and fund managers’ behaviour can amplify risks. This lends support to the expansion and strengthening of industry oversight, both at the individual fund and market levels.

The high equity premium and high volatility in equity markets have long been a puzzle. This column discusses how rare, economy-wide disasters can account for this conundrum, as well as for patterns in prices, consumption, and interest rates during the Great Recession.

The recent remarkably low interest rates have puzzled economists. The standard explanation rests on the extraordinary manoeuvres of the world’s largest central banks. This column argues, however, that it is due to economic developments, specifically globalisation and the collapse in labour power in the west.

Futures prices are a potentially valuable source of information about market expectations of asset prices. This column discusses a general approach to recovering this expectation when there is no agreement on the nature of the time-varying risk premium contained in futures prices. The authors illustrate this approach by tackling the long-standing problem of how to recover the market expectation of the price of crude oil.

There has been a long-term downward trend in labour’s share of national income, depressing both demand and inflation, and thus prompting ever more expansionary monetary policies. This column argues that, while understandable in a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance. The authors propose policies to raise the share of equity finance in housing markets; such reforms could be extended to other sectors of the economy.

Since capital flows to and from hedge funds are strongly related to past performance, an exogenous liquidity shock can trigger a vicious cycle of outflows and declining performance. Therefore, ‘noise’ trades – usually thought of as erratic – may in fact be persistent. Based on recent research, this column argues that there can be multiple equilibria with different levels of liquidity and informational efficiency, and that the high-information equilibrium can under certain conditions be unstable. The model provides a lens through which to interpret the ‘Quant Meltdown’ of August 2007 and the recent financial crisis.

In 2013, policymakers began discussing when and how to ‘taper’ the Federal Reserve’s quantitative easing policy. This column presents evidence on the effect of Fed officials’ public statements on emerging-market financial conditions. Statements by Chairman Bernanke had a large effect on asset prices, whereas the market largely ignored statements by Fed Presidents. Emerging markets with stronger fundamentals experienced larger stock-market declines, larger increases in credit default swap spreads, and larger currency depreciations than countries with weaker fundamentals.

Policymakers have long been concerned that large capital inflows are associated with asset-price booms. This column presents recent research showing that the composition of capital inflows also matters. The association between capital inflows and asset-price booms is about twice as strong for debt-related than for equity-related investment. Policymakers should therefore pay attention to the composition of capital inflows, since debt-related inflows may still undermine financial stability even if they do not result in an overall current-account deficit.

Higher asset prices increase the value of firms’ collateral, strengthen banks’ balance sheets, and increase households’ wealth. These considerations perhaps motivated the Federal Reserve’s intervention to support the housing market. However, higher housing prices may also lead banks to reallocate their portfolios from commercial and industrial loans to real-estate loans. This column presents the first evidence on this crowding-out effect. When housing prices increase, banks on average reduce commercial lending and increase interest rates, leading related firms to cut back on investment.

Financial transaction taxes are designed to raise revenue and stabilise financial markets, but their effect on market volatility is controversial. This column presents evidence from the sudden reintroduction of stamp duty on new housing projects in Singapore. Overall trading volume declined while volatility increased. These effects were strongest for previously underpriced projects, consistent with the hypothesis that informed speculators were more strongly discouraged by the tax than noise traders. This suggests that financial transaction taxes may reduce the informativeness of asset prices.

The 2013 Nobel laureates’ work has greatly improved our understanding of asset markets. Their blend of rigorous statistical analysis, economic theory, and respect for ‘market wisdom’ has provided a huge impetus to the field of empirical asset pricing – one of the most important and active areas of economics research. The insights gained in this field have important real-world implications, helping individuals to make better investment decisions and policymakers to design more appropriate financial regulations.

Existing literature continues to be unable to offer a convincing explanation for the volatility of the stochastic discount factor in real world data. This paper provides such an explanation, demonstrating that financial markets, by their very nature, cannot be Pareto efficient except by chance. Although individuals in our model are rational; markets are not.

Modern economies often experience large movements in asset prices that have significant macroeconomic effects. Yet many of these movements in asset prices seem unrelated to economic fundamentals and are often termed “bubbles”. This column explains how recent advances in the theory of rational bubbles can help us to understand these movements in asset prices and their macroeconomic implications.

Previous research suggests that the potential for rare, but large, economic disasters helps explain the equity-premium and related asset-pricing puzzles. This column presents evidence from a new empirical model of consumption disasters and discusses a range of assumptions required for the model to predict the observed long-run average equity premium.

The US Federal Reserve has used unorthodox policy instruments to reduce recent financial turmoil. In this column, the author of CEPR Policy Insight 23 argues that the crisis raises more fundamental questions about core tenets of modern monetary orthodoxy – inflation targeting and central bank independence.

Many observers have argued that central banks should use monetary policy to prevent the rise of asset price bubbles. Recent research shows that monetary policy is too costly and too slow to serve such a role.